Calculate How Much Of A Reserve Fund You Need

By Phil VillarrealFebruary 28, 2012

Personal finance experts crow on and on about how crucial it is to save up a reserve fund to help you survive a job loss or financial disaster. Deciding exactly how much to set aside, however, is a matter of philosophies and resources.

An easy way to play with the numbers is to try a calculator geared to help you discover how long your savings will last. Bankrate and Money-Zine, among many other sites, offer tools to help you figure out a savings goal.

It’s important that a reserve fund is quickly accessible. Although it’s tough to find high-yield savings accounts these days, it’s best to park the money somewhere where it will collect at least some interest.

We’ve finally gotten to the point where we have a small emergency fund in a savings account. It’s only 1K, but since we live paycheck to paycheck, that’s been such a relief to know that we’ve been able to save up. It might actually be 1.5K now.

We wouldn’t be able to live on it for months… but if our car breaks down, or one of the kids has to go to the doctor… at least we can manage.

I’ve dreamed of having 1K in savings for years. When we actually managed it, I felt like crying.

I had $1400 at one point, but thanks to stuff breaking, it went down pretty quick. People say “Sell stuff, put the money in there.” No one will buy anything I own that is decent so I end up giving it away. Next time someone says that I’m going to tell them “YOU buy it!”

I constantly here this advice, but my god does it come across as contrived. I always hear stuff like “have 6 months of income saved for emergencies!” Really? 6 months? I’m pretty sure the people that can afford to save 6 months of income, aren’t the kind of people who are going to need it.

Yes, saving is always good. Yes, being prepared is good. But, there are more realistic goals people can set. Like putting away money for retirement.

I struggle with this one too. I do save regularly, and at a reasonable percentage of my income at that, but on a moderate income, the impact is greater. If I can save an extra hundred or so a month, I do it. What that means usually is that none of us needed a doctor, dentist or vet, and nothing in the house or car broke, not that I cut back on anything else to save more.

We don’t have an “emergency fund”, just a “we hope to buy a house someday” fund that we would be willing to use for an emergency. But I don’t know what the next step is, because once we buy the house (someday meaning hopefully within the next 3 years), our life savings will be completely tapped out, and it took us years to save this much, so it’s right back to square one. If we didn’t have a big savings goal (house) we likely would never have tied up over a couple months worth of living expenses in savings.

But once you buy the house and put down 10-20% to do it, you’ll have equity you could tap into in case of emergency. And if you make capital payments on the mortgage each month (rather than just paying the interest), you’ll build equity rapidly, assuming the value of the house doesn’t decrease after you buy it.

>>I’m pretty sure the people that can afford to save 6 months of income, aren’t the kind of people who are going to need it.

How do you mean? I have 6 months of income saved. So am I:
a) not going to lose my job so I’ll never need the money
b) might lose my job but I’ll get another immediately so I’ll never need the money

I’m not seeing any other options that fit your comment and, as far as I know, neither of these things is guaranteed in my life. Plenty of people have lost good jobs and had to live on their emergency funds while finding another.

No, George is not right – you are. George is suffering from the prepubescent malady of narrow-mind syndrome NMS. He doesn’t understand that most people in the U.S. live from paycheck to paycheck, making barely enough money to cover the necessities. He doesn’t know that in the past generation, the cost of these necessities has galloped ahead of inflation in order to squeeze every last dime from our paychecks. George either earns a moderate to high income, and/or has, compared to most Americans, low living expenses. He thinks that everybody lives the same way as he does, or could if they “really wanted to” if they weren’t so lazy or stupid. Because his brain hasn’t completely unfolded yet, he doesn’t apprehend that people’s income options differ due to different local and personal circumstances, many of which he hasn’t personally experienced. Often people with NMS have significant others in their lives who have contributed or are contributing significant resources, but this is not recognized openly. Having enough money left over to save is a real blessing, and doesn’t happen to everyone, even those with good money management skills.

If you are able to have 6 months saved income, you’re probably in a pretty good financial situation already, and if you did lose your job, there’s a good chance that your spouse (if you have one) has an equally good paying job, or you have stocks and bonds, or other financial resources that most of us, living paycheck to paycheck, don’t have.

I smiled when I read this. I’d love to have 6 months pay in an emergency fund! Problem is, my paycheck is mostly spoken for when I get it. Even if I totally canceled cable/phone/internet package, garbage pickup, home newspaper delivery, and Netflix, it would take me 63 months to save up 6 months take home pay.

In that timeframe, I’m quite sure any money saved would be eaten up by yet another emergency, and all the while I’d have no TV, phone, internet, newspaper, and would be sitting on every increasing piles of garbage. No thanks.

>> In that timeframe, I’m quite sure any money saved would be eaten up by yet another
>> emergency, and all the while I’d have no TV, phone, internet, newspaper, and would be sitting
>> on every increasing piles of garbage. No thanks.

Yeah, cause using up your emergency fund prevents emergencies from happening, and creating one ensures one will. ;-)

Rather than a high-yield savings account, consider storing as much as you can in low-penalty CDs. For example, Ally Bank’s High Yield CD only have a penalty of 60 days’ interest for early withdrawl. This has two advantages: (1) you will earn a higher rate of interest, and (2) you will be less likely to tap into the money unless it is really an emergency.

You can split your emergency fund into a series of $1000 CDs so you only have to break the ones you need in an emergency. Also, most CDs let you deposit the interest into a savings account if you want, so you can still get a little extra spending money each month.

I would never consider prepaying. If only prepayments could be undone in the future, on demand. Then I’d say sure, do it. But the fact that you can prepay 10 payments and then miss one payment and be considered “in default” makes it not worth the risk.

I guess it depends on a lot of factors. Overall, IMHO, it’s better to have a bigger safety net, because prepaying your mortgage/car only decreases the loan balance (which isn’t necessarily a bad thing). But, if you were to lose your job, you would still have to make your monthly payments. These would be exactly the same amount whether you prepaid or not (it’s just you will have fewer of them in the future).

I was talking about pre-paying my monthly payments, not making addtional principle payments. As it is now, my next car/house payments are not due until July.

I know with the car payments (thru a credit union), I only pay interest on the balence of the loan. So effectivly I am not paying interest on the portion I would just normally have sitting in the account.

I’m not sure how the prepayments work with my mortgage (small community bank I work at)

I would go with a large safety net as well. I can use that money in anyway I see fit, instead of it being tied up in future electic bills, or cable bills.
However, I have a co-worker who has prepaid all of his bills (Electric, cable, water) ahead of time, except for his mortgage. He reasons that the bank will take months to kick you out, and in the mean time you can live in your house comfortably. I don’t think it’s a good plan, but it’s an interesting one.

I had a huge ‘emergency fund’ in savings at one point, enough to cover about 10 months, but over the last year I cut it back to 4 months worth. I did this since it’s absurd to keep large amounts of money in savings accounts with interest rates far below the inflation rate. The six months of difference went into mutual funds.

Well, what do you do with the extra savings that you are continually going to accumulate? I’m in pretty much in the same boat as you are. Maybe even worse (in a weird sense). I have like 5 years worth of “emergency” fund. To put that money into mutual funds seems like losing money at this point since the market is so high, and I already have money in the stocks. I went all-in during economic down-turn 4 years ago. Maxed out 401k… hm… no real good place to money in…

Meh, not any more than having an entire town built and living off of money brought in by these pirates. We already know where they are, just no one really has authority to do anything about it in Somalia. From that article:

Haradheere, 400 km (250 miles) northeast of Mogadishu, used to be a small fishing village. Now it is a bustling town where luxury 4×4 cars owned by the pirates and those who bankroll them create honking traffic jams along its pot-holed, dusty streets.

Somalia’s Western-backed government of President Sheikh Sharif Ahmed is pinned down battling hard-line Islamist rebels, and controls little more than a few streets of the capital.

The administration has no influence in Haradheere — where a senior local official said piracy paid for almost everything.

“Piracy-related business has become the main profitable economic activity in our area and as locals we depend on their output,” said Mohamed Adam, the town’s deputy security officer.

“The district gets a percentage of every ransom from ships that have been released, and that goes on public infrastructure, including our hospital and our public schools.”
Somalia’s Western-backed government of President Sheikh Sharif Ahmed is pinned down battling hard-line Islamist rebels, and controls little more than a few streets of the capital.

The administration has no influence in Haradheere — where a senior local official said piracy paid for almost everything.

“Piracy-related business has become the main profitable economic activity in our area and as locals we depend on their output,” said Mohamed Adam, the town’s deputy security officer.

“The district gets a percentage of every ransom from ships that have been released, and that goes on public infrastructure, including our hospital and our public schools.”

Seems like a prime target for an international strike team though, right? I guess as long as they minimize killing, always give the ships back after ransom, and avoid military targets, they might be able to avoid a true military response. Seems like those countries that keep getting their ships pirated would want to defend their interests though. I get that these people don’t have other prospects, but this is not too many notches down from terrorism.

Oh, I totally agree with you, but Somalia is a sovereign country. You can’t just invade it (which is what a strike team would be tantamount to) because some crinminals are operating out of a town there and hurting your business interests. You would have to coordinate with the government in order to do so legally, and there is precious little of that in Somalia. Still, the US has no problem illegally entering other countries under force to defend our interests and citizens, so I can certainly see it happening if piracy remains a persistent problem.

Plus, I also have a plan on what to do if I ever lose my job.
If ever end up in the hospital, without a job, without health insurance, I’m not going to pay the bill. It’s not like they can un-heal me. I can live with bad credit. I have great credit right now.

Not to say I’m judging you (I might do the same thing), but what about the ethical concerns? If everyone did that, healthcare costs would skyrocket for those that are willing to actually pay. It’s a vicious cycle really: health care is expensive, so people don’t pay. Most people aren’t paying, so the people who do pay have to pay more. Rinse and repeat.

I bought my first car a few months before I bought my house. I was young, stupid, and wasn’t in a relationship. Every penny I made went to pay for my bills and I got by. Then I met my ex — that was the time when I started to feel trapped because I can’t get out. I paid my car off early and tried to put away the money I used to make toward car payment. I have no idea where did any of that money went, it wasn’t in my savings account. A lot of that went toward various things, home repairs, car repairs, dental work, etc. (I guess I did have an emergency fund in that case — I did manage to pay all that off with what I saved up.) I tried saving up toward a “household” emergency fund, but I only put a little bit away. For me to be able to save up enough for one full month, it’d take about four months of savings. So it’d take me two years to actually save up enough to build a six-month emergency fund. (And this is for household expenses alone — this doesn’t include “personal” expenses such as gas, car insurance, and phone bill.) Obviously I didn’t achieve this goal in time, or I wouldn’t be in such an ugly stage with my brother. (Yes, it got worse… It’s pretty suffocating and driving me mad…)

Today I got my first reduced paycheque. Tomorrow I get to report to the State to see if I’ll be able to get some partial unemployment. Whatever I’m making is not enough for me to pay off everything in a month. If I do get partial unemployment, I might be able to barely get by. *Might* be. What is really sad is that, if I moved in with my ex before, what I am currently making is enough to let me live like a king, and still be able to put probably 60% of that money away each month. (This distresses me greatly to really think about how the living standards is so high in this area…)

Anyway, I went off base, but I guess this is just a painful and sensitive subject for many people. Right now, all I could do is urge all my friends to 1.) don’t commit to buying a place when they are not ready to get tied down for the next 5-30 years 2.) build an emergency fund while they still can. Luckily most of them aren’t committed to a house, so they have little more money floating around (though rent is insanely high in Jersey too) than I do. It’s really to talk about saving up enough for X number of months, but it’s incredibly hard to do depending on your circumstances.

There is a lot of pressure to buy a house. Financially, it just makes more sense. Instead of pouring all of your money into someone else’s investment via rent, you’re investing it in your own house. Eventually, the home owner will own the house outright, and won’t have mortgage or rent to pay. The renter however, after the same amount of time, has nothing to show for it.

But, you’re right, it’s a huge commitment (even if you can afford it). How long are you willing to live in that spot? I’ve spent my entire life moving every couple of years, so the idea of being tied down by home ownership is unappealing. At the same time, the idea of throwing all of my money away via rent is unappealing as well.

There was a lot of pressure coming from my family too. And the idea of wasting money away on rent was getting to be too much. At that time, the rent alone was the same as my mortgage (if you were a new renter on the same unit I was living in — it would have been something like $1,800 a month for a 2 bedroom apartment, it was NOT a luxury apartment complex either), and the cost of rent was definitely was at all-time high in the area. The idea was that we’d live here for a few years and then have something to sell and have some money recoup. We’ll get a small tax deduction every year and if and when we do sell, we might get a little bit back instead of wasting everything away on rent.

I guess we just didn’t expect for the housing market to sink so low. I also didn’t expect to meet someone who lives half way across the country. I guess that’s just part of life, lots of uncertainties… And the pressure of being a homeowner is also something a non-homeowner wouldn’t really get — a couple of my friends are basically like “walk away” or “just sell it”. It doesn’t really work like that…

Money-zine told me that we are ABOVE the optimum emergency fund. Er, no; we’re actually at an income level that makes larger emergency funds (more than 6 months) desirable, since my husband is of an age and at a career point that it would be difficult or impossible for him to find a similar position at the same income.

Taking the advice of Dave Ramsey, I have chosen to take six months of household expenses, minus payments on my unsecured debts (which will be halted in the interest of my survival). His advice was three to six months, and I chose to go to the conservative end of it.

The most I have ever been out of work was two months, however, that was in an average job market. The current job market sucks.

Unfortunately, it is currently depleted by multiple emergencies last year including the totalling of a car and pitching in to help a family member who was displaced by flooding.

That is $3199 per month… and I could probably trim at least $200+ off of that if needed.

So… $19k for an emergency fund… ANY mature adult working in their chosen field should be able to save something. Living paycheck to paycheck should never be the option. I find those that do, are either extremely unlucky or make bad decision after bad decision financially.

I was laid off for Eight Months… I had over a year of funds that we could live on even without getting unemployment…. I had been saving for years as every February we had layoffs… Writing was on the wall.

Add me to the list of people that HAD an emergency fund. Then unemployment happened and I haven’t been able to build it back up again. Given the lower paycheck, the higher bills, my truck breaking down more often and the dogs getting older needing more medical attention, it sucks right about now.

Sure I’ve been selling everything “extra” that I don’t need or use anymore. But who wants old stuff? Between the yard sales and ebay I think I’ve only made a couple hundred bucks…if that.